Work Matters

CEO Influence and Lovaglia’s Law

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supermoxie

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I mentioned Rakesh
Khurana’s book Searching
for a Corporate Savior in my last post. After I wrote it, I realized that
Rakesh may have found an instance of Lovaglia’s Law: "The more
important the outcome of a decision, the more people will resist using evidence
to make it."

Rakesh’s book is so compelling because he blends
impressive quantitative data with insights from his in-depth research on how
senior executives are selected and evaluated by corporate boards. Rakesh described how directors of huge
companies had enormous faith in the power of CEOs that went beyond anything
that could be justified by any research, how they spent vast amounts of money
and time searching for new corporate saviors, and paid out huge sums to
executive search firms and to the CEOs they ultimately hired. Following Lovaglia’s Law, perhaps because
these decisions were so important, Rakesh found that when he asked corporate
directors if CEOs are worth all that money, they reacted with anger and
surprise, as if he had raised a taboo subject. He found that they had
“virtually religious” convictions on the subject, which led them to dismiss any
evidence showing that CEO quality is not a primary and powerful cause of company performance.
My hunch is that they would have been more receptive to evidence about more
trivial decisions, such as what colors to paint the walls or what music to play
in the elevators.

Comments

3 responses to “CEO Influence and Lovaglia’s Law”

  1. ann michael Avatar
    ann michael

    These boards also “spent” their reputations. Once they pronounced someone the savior, how could they risk questioning their own judgement?
    I bet they’d do it in a second if it weren’t “their guy” in the CEO’s seat!
    I worked for a CEO that put someone in charge of a huge part of his business and although EVERY senior leader in the company eventually came to realize (and communicate to him) that the appointed guy was not right for the job (with evidence), he never saw it (or would, at least, never admit it).
    Ironically the CEO is gone but that person is still there – in the same job!

    Reply
  2. Alexander Kjerulf Avatar
    Alexander Kjerulf

    Excellent point Bob (and an excellent blog all-round).
    Did you see James Surowiecki’s article in the New Yorker on why overpaid CEO’s are bad for business:
    http://www.newyorker.com/talk/content/articles/060213ta_talk_surowiecki
    From the article:
    it’s becoming increasingly clear that, from a shareholder’s perspective, overpaid C.E.O.s aren’t just expensive; they’re downright destructive. One recent study of the market between 1992 and 2001 by economists at Rutgers and Penn State found that the more a C.E.O. was paid, relative to his peers, the more likely his company was to underperform in the stock market.
    It’s the hero myth, the easy fix and Lovaglia’s law rolled into one.

    Reply
  3. Women Avatar
    Women

    http://www.women1.org/
    a woman, or the feminine in men and women, seeks to share deep awareness of the world
    in a sacralized communion. the presence of soft candle light, wild flowers, and the
    rituals of dressing for the occasion are simply metaphors acknowledged and “lived out”
    in honor of the moment. in honor of life. in honor of shared awareness of the infinite
    in a moment.

    Reply

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